Feldblum Flashcards

Question

Positive Adjustments to Surplus:

Answer 1

2) decrease in non-admitted assets is an increase in net admitted assets; the positive figure in column 3 of Exhibit 1 increases surplus on page 4

Answer 2

1) assets on lines 10-17 and 19-21 of the balance sheet (i) bills receivable, past due, taken for premium, (ii) furniture and equipment (iii) loans on personal security Exhibit 1 does not include the non-admitted portions of financial assets (lines 1 -9 of the balance sheet), or the excess of book over market (or amortized) values

Answer 3

change in the excess of book over market from one year to the next net unrealized capital gains or losses are shown as a separate adjustment to surplus page 4

Answer 4

two statutory accounting options for non-admitted assets: * Method 1: Write off the non-admitted asset as an expense in the income statement. * Method 2: Use GAAP entries for the balance sheet and the income statement, but classify the asset an non-admitted with a direct charge to surplus

Answer 5

Both entries are on the balance sheet, and there is no effect on GAAP equity. These are ledger entries; the purchase of the furniture is shown on the accountant’s ledger. For statutory financial statements, the Method 1 accounting entries are * Credit cash by $100,000 (cash paid to purchase furniture). * Debit general expenses (income statement) by $100,000. The entries are on different financial statements, and statutory surplus declines by $100,000

Answer 6

The Method 2 accounting transactions are * Credit cash by $100,000 (cash paid to purchase furniture). * Debit an office furniture asset by $100,000. * Enter $100,000 in the non-admitted column for the office furniture asset. * The non-admitted assets increase from $0 before the purchase of the furniture to $100,000 after the purchase of the furniture. The change in non-admitted assets of +$100,000 is a direct charge to surplus. The year-end 20X5 GAAP non-ledger entries are: * Credit the office furniture asset by $10,000 to reflect depreciation. * Debit depreciation expense (income statement) by $10,000

Answer 7

if Method 1 is used for the initial purchase, there are no accounting transactions in subsequent years; the full $100,000 was an expense in 20X4

Answer 8

accounting transactions are * Credit the office furniture asset by $10,000 to reflect depreciation. * Debit depreciation expense by $10,000. The non-admitted office furniture declines from $100,000 to $90,000. The -$1 0,000 change in non-admitted assets is a credit to surplus, offsetting the debit from the income statement

Answer 9

Statutory Method 1 says that the office furniture has little or no realizable value. It can not be used to pay claims, so its entire value is written off when it is purchased. Method 1 requires two sets of books: one for GAAP and one for statutory accounting. This complicates the accounting, and it may lead to errors. Method 2 uses GAAP books only, but it non-admits certain assets. The income statement entries are the same as for GAAP statements; any changes needed are made by direct charges and credits to surplus

Answer 10

Accrued retrospective premiums are taken from the Underwriting and Investment Exhibit, “Recapitulation of All Premiums,” page 8, Part 2A, column 5, line 33, “accrued retrospective premiums based on experience,” and entered on page 2, line 10.3, column 1. The non-admitted portion (usually 10% of the unsecured portion) is entered in column 2 and the difference is entered in column 3

Answer 11

Any transaction that affects the balance sheet but not the income statement is a direct charge or credit to surplus. For instance, an increase in the Schedule F provision for reinsurance does not flow through the income statement but it increases liabilities on the balance sheet, thereby decreasing balance sheet surplus. The increase (decrease) in the provision for reinsurance from the previous year to the current year is a direct charge (credit) to surplus

Answer 12

Suppose an insurer has a 50% pro-rata reinsurance treaty with an authorized reinsurer. A loss occurs on March 1 and a direct case reserve of $200,000 is posted. On June 1 , the loss is paid for $300,000. At year end, the reinsurance recovery has not been collected and it is more than 90 days past due. The financial statement entries are March 1 : Debit incurred losses $200,000 (direct loss, income statement) Credit incurred losses $100,000 (reinsurance recoverable, income statement) Credit case resen/e $200,000 (direct loss, balance sheet) Debit case reserve $100,000 (reinsurance recoverable, balance sheet June 1 : Debit incurred losses $1 00,000 (direct loss, income statement) Credit incurred losses $50,000 (reinsurance recoverable, income statement Debit case reserve $200,000 (direct loss, balance sheet) Credit case reserve $100,000 (reinsurance recoverable, balance sheet Credit cash $300,000 (direct loss, balance sheet) Debit reinsurance recoverable $150,000 (balance sheet) Dec 31: Credit provision for reinsurance $30,000 (balance sheet) Change in provision for reinsurance $30,000 (direct charge to surplus

Answer 13

Unrealized capital gains are direct credits to surplus. Suppose that on December 31 , 20X4, an insurer has $100 million of assets, $60 million of liabilities, and surplus of $40 million. The assets are 80% bonds and 20% common stock. In 20X5, the stocks increase in value to $30 million. The federal income tax rate is 35%. The 20X5 financial statement entries are * Debit stocks $10 million (balance sheet) * Credit deferred tax liability $3.5 million (balance sheet) * Unrealized capital gains of $10 million (direct credit to surplus) * Change in deferred tax liability of $3.5 million (direct charge to surplus)

Answer 14

Suppose an insurer writes a block of policies with written premium of $1 00 on July 1 , 20X4. Acquisition costs are $20 million and expected losses are $80 million; investment income covers other expenses. GAAP recognizes the premium and the expenses over the term of the policy by setting up both an unearned premium reserve and a DPAC (deferred policy acquisition cost) asset and amortizing them over the policy term. On December 31 , the remaining UEPR is $50 million and the remaining DPAC is $1 0 million, for a net reserve of $40 million. We show the GAAP and statutory accounting entries for two scenarios: If by December 31 , 20X4, incurred losses are $45 million, and the insurer expects another $45 million of incurred losses in the next six months, the DPAC is reduced to $5 million, and expenses are debited by $5 million on the income statement. Statutory has no DPAC, so no accounting entries are needed If by December 31, 20X4, incurred losses are $65 million, and the insurer expects another $45 million of incurred losses in the next six months, the DPAC is reduced to zero, and a premium deficiency reserve of $15 million is set up on both GAAP and statutory statements.

Answer 15

We show the accounting entries for a $10,000 policy written on October 1 , 20X3, with an estimated audit premium of $2,000. The estimated earned premium for the full policy term is $12,000, of which the 20X3 portion is $3,000. Estimates of audit premiums may be included as written premium or as a separate adjustment to earned premium. The accounting entries on 12/31/20X3 are either * written premium of $1 2,000 and an UEPR of $9,000 or * written premium of $1 0,000 and an UEPR of $7,000.

Answer 16

Suppose an insurer buys $100 million of investment grade 6% coupon bonds on March 1 , 20X4, and classifies them as available for sale (FAS 115). By December 31, 20X4, interest rates have declined and the market value of the bonds is $102 million. In 20X5, the issuer fails to pay the August 31 coupon, and the bonds are downgraded to class 4. On December 31 , 20X5, the market value of the bonds is $90 million; the August 31 coupon is still not paid, but the company expects to collect it next month. We show the accounting entries. 20X4: The cash received of $3 million and the accrued interest of $2 million are revenues (credits) on the income statement and debits to cash and to interest receivable on the balance sheet. On the GAAP balance sheet, the bonds are marked to market ($102 million). The $2 million increase is a direct creditto equity; it does not flow through the income statement. On the statutory balance sheet, the bonds remain at (amortized) cost of $100 million. 20X5: The cash received on February 28 of $3 million and the accrued interest of -$2 million are revenues on the income statement and debits to cash and interest receivable on the balance sheet. By year-end, the bond has been downgraded to Class 4, and it is shown at market value on both GAAP and statutory financial statements. GAAP shows a $1 2 million charge to equity, and statutory accounting shows a $10 million charge to surplus.

Answer 17

Statutory accounting does not admit any of the interest, since the payments is more than 90 days past due. Method 1 shows no balance sheet or income statement entries. Method 2 shows the same entries as GAAP and then classifies the assets as non-admitted and have a $5 million direct charge to surplus

Answer 18

On December 31, 20X4, an insurer buys a shopping mall for $50 million as a real estate investment. Rental income is $8 million a year, and depreciation is $2 million a year for 25 years. On December31, 20X5, the market value of the mall has increased to $53 million. 20X6, a competing shopping mall opens 4 miles away, and by December 31 , 20X6, the market value of the insurer’s shopping mall is $43 million. * 2004: Cash is credited $50 million and investment real estate is debited $50 million; there is no change in surplus. * 2005: Rental income flows through the income statement at investment income ($8 millioncredit) and cash is debited $8 million. Depreciation expense is debited $2 million (income statement), and investment real estate is credited &2 million. No entry is made for the increase in market value. * 2006: The rental income and depreciation entries are the same as for 2005. The book value of the real estate is $46 million, of which $3 million is not admitted (excess of book over market value), and there is a $3 million direct charge to surplus

Answer 19

An insurer begins the year with $100 of 8% coupon bonds maturing on December 31 in five years. The tax rate is 35%, and taxes are paid when cash is received. The insurer remits the after-tax investment income to its shareholders. On December 31, the insurer sells an additional one million shares of common stock, with a par value of $1 per share and a sale price of $1.50 per share. We show the accounting entries. On June 30, the insurer receives $4 million of bond interest: $4 million x 35% = $1 .4 million is paid to the Treasury and $2.6 million are shareholder dividends; the same transactions occur on December 31. The accounting entries on each date are * Debit cash $4 million (balance sheet) * Credit investment income $4 million (income statement) * Credit cash $1.4 million (balance sheet) * Debit tax liability $1 .4 million (income statement) * Credit cash $2.6 million (balance sheet) * Shareholder dividend $2.6 million (direct charge to surplus)

Answer 20

* Debit cash $1 .5 million (balance sheet) * Credit common capital stock $1 million for par value of common stock (balance sheet) * Credit paid-in and contributed surplus $0.5 million for excess of sale price over par value (balance sheet) * Direct credits to surplus: $1 million for capital paid in and $0.5 million for surplus paid in

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